Martin Wolf: Wealth without power
TUESDAY JULY 1 1997
Little else is requisite to carry a state to the highest degree
of opulence from the lowest barbarism, but peace, easy taxes and a tolerable
administration of justice; all the rest being brought about by the natural
course of things." Adam Smith
At its peak, the British empire possessed a quarter of the world's population
and land mass. Within China's frontiers now lives a fifth of the word's
people. But Hong Kong, the juicy bone that has just been passed from the
former to the latter, is richer than either. This is a big fact about a
small place - one with important lessons.
In 1995, according to the World Bank, Hong Kong's real income per head
(at purchasing power parity) was US$22,950 (£13,909). This was 20
per cent higher than that of the UK and almost eight times as high as mainland
China's. Of the advanced economies, only the US and Switzerland had higher
real incomes per head. Yet Hong Kong has no large internal market; it belongs
to no preferential trading bloc; and it employs no trade protection. It
is a rock whose only natural endowment is its harbour. But it owns the
resource that matters most: an active and enterprising people.
The quality of a people is not itself enough. A successful economy also
needs benign policies and efficient institutions. So when China boasts
that Hong Kong's return marks the end of a national disgrace, Britain can
respond that Hong Kong's 6.2m Chinese have enjoyed better government and
greater opportunities than Beijing has yet provided for its own people.
If this is disgrace, whose is it?
The fascinating new World Development Report from the World Bank shows
that in countries with good governance and sound policies real income per
head grew at 3 per cent a year between 1964 and 1993*. With reasonable
policies, but poor government, growth per head was only 1.4 per cent. In
countries with neither it was a mere 0.4 per cent. The state possesses
the monopoly of legitimate force. A benevolent and competent monopolist
is almost as fabulous as the unicorn. Hong Kong's government has been both.
The colony's success also underlines the value of open international trade.
Adam Smith argued that "were all nations to follow the liberal system
of free exportation and free importation, the different states into which
a great continent was divided would so far resemble the different provinces
of a great empire". Politically, Hong Kong belonged to the British
empire. Its economic domain was the world.
The mainland only started to prosper once Deng Xiaoping allowed it to become
a relatively open trader, instead of a closed territorial empire. China's
growth soared as trade in goods and services jumped from 5 per cent of
gross domestic product at market prices in 1970 to 40 per cent in 1995.
Openness to trade does more than allow prosperity. It divorces economic
opportunity from power. This classical liberal insight has been rediscovered
by Professor Alberto Alesina of Harvard University and several associates.
In the latest of a series of papers, the authors argue that "trade
liberalisation and political separatism go hand in hand. . . . In a world
of free trade and global markets even relatively small cultural, linguistic
or ethnic groups can benefit from forming small and homogeneous political
jurisdictions that peacefully trade and are economically integrated with
Openness to trade tends to make a country richer. Indeed, the principal
difference between small countries and big ones at a given level of income
per head is that the little ones trade more. The obvious alternative to
trade is to expand the country, by merger or conquest. But the benefits
of greater size become less important as states become more open to trade.
"Open countries are able to reap the benefits of access to a large
market, thereby avoiding the costs associated with being small," argue
Prof Alesina and associates.
Such small, open economies can also avoid the costs of size. The larger
the state the more heterogeneous it tends to be. The combination of size
with heterogeneity creates big difficulties: the citizens are more likely
to be unhappy over policies they are forced to share; organised interests
are more likely to dominate politics; and the government is more likely
to prove remote and unaccountable.
Today, 10 countries have populations of over 100m. Only two, the US and
Japan, are rich. But the US is exceptional for its historic combination
of small government with individual liberty, while Japan is unusual for
its compact size and homogeneity. The rest of the group - China, India,
Indonesia, Brazil, Russia, Pakistan, Bangladesh and Nigeria - are remarkable
mainly for their modest incomes and the difficulties their governments
have in achieving coherence and maintaining control.
Similarly, defined by the magnitude of their conquests in relation to the
size of the original mother country, Europe's greatest imperial powers
were Portugal, Spain, the Netherlands, the UK and Russia. None seems to
have drawn enduring economic benefit from its vast empire. Usually, the
easy resources and glittering prizes of empire distorted economic life
and distracted political attention.
Writing in 1909, Norman Angell argued (in his celebrated book, The Great
Illusion) that "the wealth, prosperity and well-being of a nation
depend in no way upon its political power; otherwise we should find the
commercial prosperity and social well-being of the smaller nations, which
exercise no political power, manifestly below that of the great nations
which control Europe, whereas this is not the case." He concluded
from this that the economic arguments for war then being advanced were
both ludicrous and suicidal. The leaders of Europe promptly proved him
Once again, Hong Kong's wealth demonstrates his point. The colony is prosperous,
but powerless. Yet, as Angell would have pointed out, it cannot be plundered,
because its wealth can only belong to the people who create it. All that
a malevolent state can achieve is ruin. In modern conditions plunder is
Thus an open world economy allows small countries to combine prosperity
with self-government. It affords the wealth of empire without its burdens.
And it offers the basis for mutually enriching and peaceful relations among
This was the view of the classical British liberals in their struggle against
the imperialists. Liberalism was right in principle, but imperialism triumphed
politically. Bellicose international relations and territorial expansion
always serve some interests, just as there are people who gain pleasure
from belonging to a great power or sitting at the top table. But none of
this has anything to do with securing a prosperous future for the peoples
of the world.
Hong Kong is a small place. But it provides big lessons. It is neither
a country's size nor its power that matters for its people's prosperity.
All that is needed are honest government, modest taxes and liberal trade.
These are more than the basis for prosperity. They are also the best way
to secure harmony, at least among civilised states.
The State in a Changing World, World Development Report 1997 (New York:
Oxford University Press, for the World Bank);
**Alberto Alesina, Enrico Spolaore and Romain Wacziarg, Economic
Integration and Political Disintegration, Mimeo, 1997.